Publications

FIO Focus, Issue No. 13

Federal Stability Oversight Council's Rule on Nonbank Financial Companies
05.01.12

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Devoted to exploring the progress of the modernization of the insurance industry, FIO Focus provides information and insights about the organizations and issues that are driving change and influencing the future of the industry.

Federal Stability Oversight Council's Rule on Nonbank Financial Companies

On April 3, 2012, the Financial Stability Oversight Council (FSOC) approved a final rule and interpretive guidance on the "Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies." The rule was published in the Federal Register on April 11, 2012, and goes into effect on May 11, 2012. It contains a three-stage process for determining if a nonbank financial company is a systemically important financial institution (SIFI), which will be subject to Federal Reserve supervision and oversight.

STAGE 1

During Stage 1, a company will be considered for SIFI status if it has more than $50 billion in "consolidated assets," and any one of the following:

  • $30 billion in gross notional credit-default swaps for which the company is the referenced entity;
  • $3.5 billion of derivative liabilities;
  • $20 billion in total debt;
  • 15-to-1 leverage of total consolidated assets (excluding separate accounts) to total equity; or
  • 10 percent ratio of short-term debt outstanding with a maturity of less than 12 months to total consolidated assets (excluding separate accounts).

With respect to United States nonbank financial companies, FSOC will apply each of the Stage 1 thresholds based on the global assets, liabilities, and operations of the company and its subsidiaries. For foreign nonbank financial companies, the Stage 1 thresholds will be calculated based solely on the United States assets, liabilities, and operations of the foreign nonbank financial company and its subsidiaries.

STAGE 2

In Stage 2, FSOC will analyze companies through a six-category framework. The categories include size, substitutability, interconnectedness, leverage, liquidity risk and maturity mismatch. The rule's guidance explains, "[t]hree of the six categories - size, substitutability, and interconnectedness - seek to assess the potential impact of the nonbank financial company's financial distress on the broader economy... The remaining three categories leverage, liquidity risk and maturity mismatch, and existing regulatory scrutiny of the nonbank financial company - seek to assess the vulnerability of a nonbank financial company to financial distress."

FSOC's Stage 2 analysis is to be based primarily on existing public and regulatory sources. FSOC will consider factors including a company's importance as a source of credit for households, businesses, state and local governments, and/or low-income, minority or underserved communities. FSOC may also consider the degree to which a company is already regulated or any other factors determined relevant.

STAGE 3

In Stage 3, FSOC will collect information from companies under consideration. The rule's guidance explains that, "[i]nformation relevant to the Council's [Stage 3] analysis may include confidential business information such as internal assessments, internal risk management procedures, funding details, counter-party exposure or position data, strategic plans, resolvability, potential acquisitions or dispositions, and other anticipated changes to the nonbank financial company's business or structure that could affect the threat to U.S. financial stability posed by the nonbank financial company." A company subject to Stage 3 will receive a notice of consideration and will have an opportunity to submit written materials to FSOC.

Based on its Stage 2 and Stage 3 evaluations, FSOC will make a "proposed determination" of systemic importance. The proposed determination requires a two-thirds vote of FSOC, including the vote of the chairman. A company subject to the proposed determination will receive an explanation of the determination and may request a nonpublic hearing to contest the decision.

Finally, a two-thirds vote of FSOC, including the vote of the chairman, is needed to designate a nonbank financial company as a SIFI. SIFI status must be reaffirmed annually. A company determined to be systemically important may contest the ruling in U.S. District Court.

Director McRaith's Remarks at the Third U.S.-EU Insurance Symposium

On April 17, 2012, Federal Insurance Office (FIO) Director Michael McRaith participated in the US-EU Insurance Symposium sponsored by the U.S. Chamber of Commerce. The discussion panels at the conference focused on addressing differences and conflicts between the United States and EU regulatory systems.

McRaith stated that the uncertainty of implementing Solvency II and the conflicts between the United States and EU regulatory systems are adversely affecting the ability of multinational insurance companies to develop long-term business plans. McRaith explained that the FIO is working with the European Insurance and Occupational Pensions Authority to address the international regulatory issues which have arisen. He also indicated that a U.S.-EU work plan on this topic will be released by the end of 2012.

The Symposium was part of a week long series of events intended to enhance understanding and cooperation among United States and EU regulators.